Tax 'ghosts' and 'moonlighters' on the hit list as evasion prosecutions are set to increase fivefold

Workers with ‘ghost’ earnings and ‘moonlighters’ who fail to declare a second source of income to the taxman face a higher risk of going to court as a result of a major push to prosecute tax evaders.

In a bid to stem the tide of evasion that costs the UK economy £14billion a year, Director of Public Prosecutions Keir Starmer has confirmed a plan to increase the number of prosecutions fivefold to around 7,500 a year by 2014/15.

As well as the organised criminal gangs with complex systems of fraud conspiracy in place, attention will also focus on everyday lower-level cheats who fail to come clean on the full extent of their earnings.

Not Untouchable: It's not just the Al Capones of this world (immortalised here by Robert De Niro) who indulge in tax evasion, and prosecutors are stepping up their efforts to bring more before the courts.

This focus has been characterised as a crackdown on middle-earners - but HM Revenue and Customs emphasised that it is blind to class in detecting tax evasion.

Among the everyday worker, HMRC says, there are two typical types of tax cheats, referred to as ghosts and moonlighters.

Ghosts are those workers who operate in the ‘hidden economy’ in that they do not declare any form of earnings to HMRC at all.

Although this can refer to those who rely on various kinds of criminality for income, it is equally applicable to the self-employed – for example a carpenter – who avoids income tax, National Insurance or corporation tax by not reporting their income.

Meanwhile, Moonlighters are those who have more than one source of income, and while they may declare one of these, they fail to declare the other.

This could be those with full-time jobs for which they make PAYE tax and National Insurance contributions, but have a second job or a rental income which they do not reveal which should also be taxed.

Other areas of tax evasion that the Crown Prosecution Service, alongside HMRC, is looking to up its game is in areas such as money laundering, the use of false or forged documents, and cases where people such as accountants or financial directors take advantage of holding a position of trust and responsibility.

As well as the Crown Prosecution Service looking to up its game when it comes to pushing ahead with evasion cases, this week Members of the European Parliament have voted for stronger measures to tackle VAT fraud.

There are several ways in which this can be carried out, and there have been a number of high profile cases in the past year in which individuals have falsely claimed VAT refunds for transactions that never took place.

In October, 36-year-old Manchester University law student Paul Hackney was jailed after fleecing the taxman to the tune of £1.5million over four years for claiming refunds on international exports of construction equipment that never happened, before banking the money in off-shore tax havens.

Richard Jordan, partner and tax expert at law firm Thomas Eggar LLP, said that Mr Starmer’s speech on Tuesday indicated there is renewed vigour in the approach to tax evasion.

Class-less: From the highest earner to the lowest earner, if you evade paying your taxes, you are naught but a criminal.

He said: ‘When Mr Starmer says he is going to get tough on tax fraud, it is implied that in recent times they have been more lenient or lacking in resource. I welcome the decision and agree that the threat of prosecution and possible imprisonment needs to be real.

‘The CPS needs to identify and bring to justice those who commit criminal tax evasion, whether they are well known or not. In times of hardship every business adds extra focus and resource to collecting its debts.’

There will also be an increase in HMRC staff looking into the setting up of companies to act as an intermediary for a person’s earnings.

Setting up such companies are useful devices for freelance workers who have incomes from several different sources and pay corporation tax on it, as well as PAYE and NI on earnings they take from it.

It has been in the national spotlight previously as many high-profile celebrities use personal service companies, and in the vast majority of cases of these companies being set up they are entirely legitimate as workers have several strands of income.

Tax avoidance is not tax evasion: it is not a criminal offence and as such cannot result in prosecution unless the extent of the avoidance crosses the barrier into evasion - such as when false documents are used to enhance the credibility of a scheme.

But HMRC will also be increasing its compliance teams to ensure earners are not incorporating themselves specifically to avoid PAYE tax and National Insurance, taking civil action if necessary to recoup the tax it is owed.

The Government introduced the IR35 regulation in 2000 to ensure that ‘disguised employees’, workers who were they not being paid through a company intermediary would otherwise be considered an employee of their client, were getting taxed in much the same way as they would were they paid as an employee.

A spokesman said: ‘We police the application of that law and we are currently increasing the number of people focused on compliance work making sure the tax rules apply as they should.’